1. Valuation Analysis and Structured Management Buy-Out of SolarTech Inc.City University of Seattle: MBA FIN 541

2. Outline Market & Financial Analysis Pro Forma Financial Plan Financing Proportions (Debt/ Equity Mix) Proposed Financing Structure Recommendation 3. Market & Financial Analysis - Profitability Hist.Hist.Hist.Hist.Hist.201020112012201020112012net sales31,032,034,0growht rateHist.n/a3,23%6,25%2,1 n/a2 -4.76%2 25.00%net income growth rateSolartech Inc. demonstrates stable increase in net sales for the last two years by reaching the level of $34.0 million for 2012;Comparing the Net sales in 2012 to those in previous years, the Net Income in 2012 indicated an increase. 4. Market & Financial Analysis Key Ratios Hist. 2012Equity ratio Debt retirement ratio Operating cash flow margin Return on assets (ROA) Operating profit margin20,4% 7,5 21,2% -30,0% 19,1%Hist. 201120,0% 6,6 18,4% -25,6% 16,3%Hist. 201020,8% 6,7 19,7% -27,4% 17,4%Ratinggood average very good dangerA good equity ratio that guarantees more free cash for future growth;Each dollar of sales Solartech Inc. makes 19 cents before interest and taxes;Negative ROA Solartech Inc. invests a high amount of capital inproduction, while receiving a little income. 5. Market & Financial Analysis: Comparison with industrySolartech Inc. operates in Renewable Energy Services & Equipment Industry; Solartech Inc. has average if not marginally better ratios than its rivals; The industry appears to be in infancy/ is made up of underachievers. 6. Market & Financial Analysis Industry Forecast(Altenergymag. 2013)The solar PV capacity is expected to continue to grow in the future growing market; The substantial fall in solar PV cost suggests fall in prices of Solartech Inc.s products and put under condition the current price of its inventory; The global cumulative installed capacity for solar PV is expected to reach 330,424 MW by 2020, growing at a CAGR of 23.7% during 2011-2020. 7. Market & Financial Analysis Debt leverage and coverage ratios Financial Covenants: Net Debt/Equity Net debt/EBITDA EBITDA/Interest expense FCF/(Interest + Principal)1,2 0,8 10,3 3,11,3 0,9 9,8 2,4Net Debt/ Equity: Moderate/ Some Headroom;Net Debt/ EBITA: Low/ Headroom;EBITDA/Interest Expense: High/ No Headroom;1,2 0,9 10,2Min./Max. Values max. 2.0 max. 3.5 min. 3.0 min. 1.0FCF: High/ No Headroom.The set up financial covenants and Solatech's ratios show that the company is in compliance with covenants. 8. Pro Forma Financial Plan The Free Cash Flow is designed to measure a companys financial performance by calculating the firms operating cash flow from its capital expenditures. 9. Financing Proportions Debt/Equity MixDebt/ Equity Mix is a balance between funds available, what the returns and covenants dictate, and the financial structure can support. Scenario 1 - an ideal mix of 60% Debt, 40% Equity Scenario 2 a mix of 15% Debt, 85% Equity. 10. Management Buy-Out This transaction is when an equity interest in the business is acquired by its management (with the cooperation of outside finance). 11. Financing Sources Management buyouts - too risky for banks to finance through a loan in itself;They typically finance at 4x cash flow; Financing structure for Solartech Inc. - partially leveraged through private equity financing (co-investor);Co-investor exits the business within 5 years while minimizing the risk. 12. Valuation For the financing structure, we will utilize the DCF value for Solartech Inc. 13. Scenario 1Scenario 2Financial Structure 14. Evaluation Investors hedge their investment bets based on a balance of return. Scenario 1 is presented as a baseline or ideal to contrast Scenario 2. a roughly 60% Debt/ 40% Equity split; it would provide an IRR of 15% in year 2016; more debt heavy then equity (compared to Scenario 2); comes closer to the ceilings of the financial covenants. 15. Evaluation, Cont. Scenario 2 -never hits an IRR of 15%, the minimum desired by an investor in the 5-year period; - high equity investment; -adequate headroom on each covenant, with the exception of IRR. 16. Mezzanine Finance? Use of mezzanine finance could be considered in scenario 1 or scenario 2, if: - purchase price exceeded the amount that could be financed using a loan/debt. Mezzanine capital treated as equity, but is essentially debt; Has a higher service fee or cost than a traditional loan; The IRR is significantly impacted due to the cost of this capital but the return preference is not there for a co-investor.Evaluation Cont. 17. Recommendation SolarTech Inc. appears to be a good candidate for a management buyout. Take in mind: Part of a growing, but immature industry segment with growing sales and good cash flow management;Concern over a lackluster ROA => poorly utilized capital internally.Proposal: The deal structure - a 60% Debt/ 40% Equity balance - best meets parameters such as Covenants and IRR. 18. References Altenergymag, (2012). Solar Photovoltaic (PV) Power - Global Market Size and Key Country Analysis to 2020. Retrieved on June 21, 2013 from: http://www.altenergymag.com/emagazine/2012/02/solar-photovoltaic-pv-power--globalmarket-size-and-key-country-analysis-to-2020/1849 CSImarket, (2013). Renewable Energy Services & Equipment Industry. Retrieved on June 21, 2013 from: http://csimarket.com/Industry/Industry_Profitability.php?ind=605 Deloite (2004). Making The Break: A Practical Guide to MBO. Retrieved June 21, 2013 from: http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Guide%20to%20mbos.pdf Eayers, Willis E., Mergers & Acquisitions: A Corporate Finance Perspective, 2013 Class Presentation International Energy Agency, (2012). World Energy Outlook 2012. Retrieved on June 21, 2013 from http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf Investopedia (2013). Debt/Equity Ratio. Retrieved June 21, 2013 from http://www.investopedia.com/terms/d/debtequityratio.asp TrcSolutions, (2013). Outlook bright for Future of Solar Energy. Retrieved on June 21, 2013 from: http://blog.trcsolutions.com/solar-energy/